Blank – Australian Full Court finds that phantom units were not taxable when they vested

In 1994, a non-resident executive was granted units which entitled him, on retirement, to receive payments calculated by reference to the consolidated profits of Glencore International AG, a Swiss corporation. He retired at the end of 2006, and became entitled to receive U.S.$160 million in instalments commencing in July 2007. He and Glencore then agreed (pursuant to an agreement which was not executed until January 2008) that the first four instalments would be paid by Glencore to the Swiss taxing authority (the FTA) in satisfaction of Swiss withholding tax on the U.S.$160 million. This remittance occurred in 2008.

The relevant Australian tax law provided that, in the case of a reward for personal service, the income “derived” by the taxpayer is the “amount…actually received in the year in question” (Brent, 125 CLR 418, at para. 13), and a deeming provision specified that “you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct."

The Full Court of the Australian Federal Court held that although two of the four instalments were due to him in 2007, they were not income to him until 2008 when they were paid on his behalf to the FTA. This is consistent with the proposition that phantom units are not constructively received when they vest but no exercise occurs (cf. Bianchini).

The taxpayer also unsuccessfully argued that a pro rata portion of the U.S.$160 million was exempt based on the fact that for roughly his first eight years of service after the grant of the units, he had been a non-resident employed outside Australia, and came to Australia to work for an Australian sub (and became an Australian resident) only in 2002. The Court stated:

[T]he Amount was incapable of apportionment as between earnings from foreign service, on the one hand, and earnings not from foreign service on the other because the agreed method of calculating that Amount did not allow for that distinction to be made. The Amount was incapable of being calculated on a per diem basis… .

If analogous facts arose in applying s. 115(1)(a)(i) to a lump sum paid to a non-resident who had worked both inside and outside Canada where apportionment on a rational basis was impossible, would one conclude that the amount was 100% exempt or 100% taxable?

Neal Armstrong. Summaries of Blank v. Commissioner of Taxation, [2015] FCAFC 154 under s. 6(1)(a) and s. 115(1)(a)(i).